My FIL passed away last month (age 56) and my wife and her sister are the beneficiaries for his IRA (95% sure is traditional, but I will confirm). 50-50 split between the two of them. I want to make sure I've got things accurate based on what I've read.

They have two choices - minimum yearly withdrawals or the 5 year withdrawal where they remove all funds within 5 years. If they do the 5 year, they will pay taxes on all earnings plus a 10% tax on the total amount they withdrawal? For example, if it's worth $100,000, with $50,000 of that being Cap gain, they will pay tax based on their tax bracket on the $50,000 and 10% tax on the entire $100,000? And the $50,000 cap gain is treated as ordinary income to the beneficiary?

The minimum yearly withdrawal is based on age and a govt divider, correct? My wife is 29, so hers is 54.3, so she would have to take out $100,000/54.3 each year? If she took out more before she turned 59.5, she would pay the 10% penalty?

Appreciate any clarification or confirmation.

Quinn said:

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My FIL passed away last month (age 56) and my wife and her sister are the beneficiaries for his IRA (95% sure is traditional, but I will confirm). 50-50 split between the two of them. I want to make sure I've got things accurate based on what I've read.

They have two choices - minimum yearly withdrawals or the 5 year withdrawal where they remove all funds within 5 years. If they do the 5 year, they will pay taxes on all earnings plus a 10% tax on the total amount they withdrawal? For example, if it's worth $100,000, with $50,000 of that being Cap gain, they will pay tax based on their tax bracket on the $50,000 and 10% tax on the entire $100,000? And the $50,000 cap gain is treated as ordinary income to the beneficiary?

The minimum yearly withdrawal is based on age and a govt divider, correct? My wife is 29, so hers is 54.3, so she would have to take out $100,000/54.3 each year? If she took out more before she turned 59.5, she would pay the 10% penalty?

Appreciate any clarification or confirmation.

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Your wife will not be penalized at 10% for distributions from a beneficiary designated IRA the way she would from her own IRA. There is no reason to force yourself to distribute the assets over 5 years unless you need the money. Even if you choose to take only the minimum required, you can still take extra at any point if you choose to.

You are correct on the calculation of her required minimum withdrawal if you choose to go that route.

Here is more info on the subject: https://www.irs.gov/publications/p590b/ch01.html#en_US_2016_publink1000230854

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Exceptions

There are several exceptions to the age 59 rule. Even if you receive a distribution before you are age 59, you may not have to pay the 10% additional tax if you are in one of the following situations.

• You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1952) of your adjusted gross income.
• The distributions are not more than the cost of your medical insurance due to a period of unemployment.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving distributions in the form of an annuity.
• The distributions are not more than your qualified higher education expenses.
• You use the distributions to buy, build, or rebuild a first home.
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.

Most of these exceptions are explained below.

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Gotcha, thanks. We have a 6 month old and are going to use some of the $ toward her college fund, so I'm trying to figure out if it makes more sense to leave it in the current IRA, or to withdraw the funds and move to the Utah plan. Will need to look further in detail to see if that makes any sense.

My wife is the recipient of an inherited IRA. We have been doing the 5 year withdrawal for a couple of reasons. One major point to look at (and was the deciding factor) was taxes. Unless I make a lot less or a lot more, I'm taxed at 25%. Or if they remove brackets or change things, I'm losing 25%. It might go to 20%, but I'd rather have the money now and have it earn the difference.

Plus, getting a small distribution and dealing with another account in a different system (i.e., BoA if everything is with WF, or with Fidelity if you bank with Chase, etc.) was something I did not want to do.


I would also suggest leaving some in cash but investing the rest in market wide funds (ETF or mutual). That way years 3-5 are returning money to you while year 1 & 2 is just cash.

Just my experience with dealing with this exact situation.

~egon

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I would also suggest leaving some in cash but investing the rest in market wide funds (ETF or mutual). That way years 3-5 are returning money to you while year 1 & 2 is just cash.

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Leave some cash in the IRA? Or just hold onto some of the cash that is received from the IRA payout and re-invest the rest into new investments? The inherited IRA actually has a portion that is cash that he never invested, so I I think we could withdraw that as is with no problems.

Quinn said:

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My FIL passed away last month (age 56) and my wife and her sister are the beneficiaries for his IRA (95% sure is traditional, but I will confirm). 50-50 split between the two of them. I want to make sure I've got things accurate based on what I've read.

They have two choices - minimum yearly withdrawals or the 5 year withdrawal where they remove all funds within 5 years. If they do the 5 year, they will pay taxes on all earnings plus a 10% tax on the total amount they withdrawal? For example, if it's worth $100,000, with $50,000 of that being Cap gain, they will pay tax based on their tax bracket on the $50,000 and 10% tax on the entire $100,000? And the $50,000 cap gain is treated as ordinary income to the beneficiary?

The minimum yearly withdrawal is based on age and a govt divider, correct? My wife is 29, so hers is 54.3, so she would have to take out $100,000/54.3 each year? If she took out more before she turned 59.5, she would pay the 10% penalty?

Appreciate any clarification or confirmation.

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Take this option.

Treat the RMD as extra 'bonus' money every year, spend it on something for you and your wife. Your idea of using it to fund the kid's college fund is a good one. Leave the remaining balance to grow.

Isn't the RMD based on the age of the oldest beneficiary? So, the older of the two siblings?

Is the full amount of the withdrawal taxed as ordinary income or is the growth taxed at cap gains rate?

That's only if they don't get it split up by 12/31/18, and my wife is the older sister anyway.

lockett93 said:

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Isn't the RMD based on the age of the oldest beneficiary? So, the older of the two siblings?

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No.

When the inherited IRA is placed in his wife's name, it becomes her IRA,so the RMD is based on her life expectancy.

Sorry for the delay.

The IRA we got was all cash. He died before he was set to 'invest' it. Like had an appointment in a week and a half before he died to determine movements.

Rather than leave it all cash, I went with 50/25/25 split. I have vanguard S&P500 and vanguard retirement income (IIRC). So when I take out a 1/5 of the money each year, I have taken cash (on year 2). Next year (or later this year), I will move out of some equities and go to cash to pay for that year's distribution.

~egon

And there is no tax on the cash you received?

Required distributions on an inherited IRA are based on the age of the deceased, not the age of the beneficiary. So your wife doesn't have to make any mandatory withdrawals until her father would have turned 70.5 years old and there is no penalty for doing so at that point. I'm no expert, but this is my understanding.....

I'm pretty sure that my wife and her sister have required minimum withdrawals, the amount based on their age, according to everything I've read.

Of course you should consult an expert, but my wife inherited an IRA from her father and that's how it worked for her......

Gottcha - I'll look into it some more.

Cleaning up a bit of the confusion here:

The RMD amount is based on a calculation taking into account the bene's age AND the age of the person who owned the Ira initially.

There is no capital gain for tax purposes on the Ira. EVERYTHING is taxable when it's withdrawn unless in some random one off scenario that some portion of the traditional Ira was an after tax contribution. And that scenario is rare enough that it's safe to assume everything is pretax and will be taxed at the ordinary income rate of you and your wife.

74OA said:

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Required distributions on an inherited IRA are based on the age of the deceased, not the age of the beneficiary. So your wife doesn't have to make any mandatory withdrawals until her father would have turned 70.5 years old and there is no penalty for doing so at that point. I'm no expert, but this is my understanding.....

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This is not correct.

I've exhausted my very limited knowledge on this subject. As I mentioned, this is how it worked when my wife inherited an IRA from her father. A couple of years after his death, our financial advisor called and said that, as my FIL would have been 70.5 that year, my wife must start taking minimum mandatory withdrawals from his IRA at that point. Perhaps he also mentioned my wife's age, but I don't recall that. Anyway, we've done that ever since and the annual withdrawals have been taxed as ordinary income. I don't know what else to say except that we've received no blowback from the IRS......

Whether the deceased was of rmd age or not at passing has nothing to do with whether or not she has to take the rmd every year (she does no matter what unless she plans on liquidating within 5 years). The age only factors into the distribution. Whether the IRS has realized the mistake or not is a separate question.

lockett93 said:

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Isn't the RMD based on the age of the oldest beneficiary? So, the older of the two siblings?

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I did more research and the oldest beneficiary rule applies when the IRA owner dies on or after required beginning date. In the OP's case, the owner was under age, so each beneficiaries age is used individually.

https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries

Quinn said:

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And there is no tax on the cash you received?

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Oh, you pay tax. The distributions are like income. Hence my comment before about brackets. If you are going to lose 25% due to being in that tax bracket, unless you see a change coming (rates, brackets, loss of job, etc.) you are going to lose it.

I figured I could lose it now, and invest/use it rather than deal with an account and a small-ish amount every year for the next 40+ years.

~egon

Being in this boat as well, I seem to recall the RMD being based on my age vs younger brother.

We inherited 3 different accounts, one I cashed out immediately, the other two I'm taking RMDs on, which are taxed as regular income. To offset that, I roll the larger distribution into my Roth since they are post tax dollars.

Of the 3 brokerages they were at Schwab was the most helpful in getting everything squared away. They have an inherited IRA MRD, as they call them, calculator. I use it and round up to be safe.

74OA said:

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Required distributions on an inherited IRA are based on the age of the deceased, not the age of the beneficiary. So your wife doesn't have to make any mandatory withdrawals until her father would have turned 70.5 years old and there is no penalty for doing so at that point. I'm no expert, but this is my understanding.....

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This is wrong.